[00:01:49]Joe Kelly: Thanks, Rodrigo. Great. Thank you for inviting me. My pleasure.

[00:01:55]Rodrigo Gordillo: Uh, just before we do begin, you know, some housekeeping. We are recording this, not for investment advice. This is for informational purposes and entertainment. So if you do have any wisdoms and nuggets here that Joe drops that you want to act upon, please do talk to your advisor before you do anything. So before we begin, uh, Joe, why don’t we start from the beginning? Tell us a little bit about, you know, how, so you got into the world of derivatives, quantitative investing, and all that fun stuff. Tell us a little bit about your past.

Backgrounder

[00:02:25]Joe Kelly:  I don’t know how interesting it is. But, so I went to school out in Philadelphia. I went to college and nine out of 10 of my friends ended up on Wall Street in New York.

But I grew up in Michigan, in the Midwest, here in the U.S. And so, you know, it was a natural fit for me to come back to Chicago, just, you know, from a cultural perspective. And so, you know, young guy, moved here without a job. And at the same time, I was a college lacrosse player. So I looped into the local club team.

And lo and behold, nine out of 10 people on the club team were options traders, some individual names, some index, some with larger shops like O’Connor and the shop I ended up with, Hull. Some were individual risk takers and some, some very, very large risk takers that I had as close friends, you know, in our early twenties.

And so, competitive person. Good math skills, you know, and frankly, looking for a home and I ended up interviewing with O’Connor and an upstart, upshot group called Hull Trading, founded by a guy named Blair Hull, not the textbook Hull, but the casino and potato futures Hull. And Blair Hull grew the organization.

When I joined, I think I was number 108. That was in 1993. In 1998, Goldman bought Hull, just as Swiss Bank bought O’Connor, kind of the same era. I think it was about 450 people globally. I had spent time in Chicago as a profit center manager at the CME and over in Frankfurt on the DTB, and it was really kind of within derivatives, one of those shops that was very forward looking in terms of the use of technology, basically just interpreting a room of financial engineers upstairs.

And as kind of the point person, you had to make sure, you know, kind of to do a sanity check at the end of all of that. And 1998 was the end of kind of real risk taking, and more institutionalization around just plug the numbers in and go. And that’s when I left that part of the business and realized, maybe not trading was a better long-term career and I found CTAs and Systematic, at that point.

[00:04:48]Rodrigo Gordillo: Okay. So that’s, that was kind of your background in that, but you, you’ve had a few iterations since then. Why don’t you walk us through like, your previous work and then, what your role is today at Campbell and Company.

[00:05:00]Joe Kelly: Yeah. So Campbell’s not my first stop. When I came out, after, you know, as part of a couple other firms as a partner, and kind of interesting and maybe not interesting, remember 1998 was right at the beginning of the tech bubble.

It was where I think kind of the hedge fund industry started growing up. and getting more institutionalized. There were a couple of larger firms already out there, but it was kind of the formalization of that. A little bit of a detour, and then I’ll get to your question, Rodrigo. Two other people and I realized during the tech bubble that as derivatives traders on the CBOE, we were providing liquidity to a lot of executives.

And that liquidity came from that executive’s private stock or employee stock option holding. And you know, they were using us to provide liquidity and hedge them out. And the C-suite was hedged out, but all of our friends in tech weren’t. And some of them had pretty sizable paper portfolios of employee stock options.

So we created a startup, raised venture money. You can think of it as like an, sort of a broker/dealer with an advice component that took your employee stock options as a mid-level employee, quantified them, incorporated all the tax implications, and was kind of a, you know, kind of a like, life goal type of engine.

This is when Financial Engines was launching as well, if you know that name. And it said, if you want to buy a house, don’t liquidate your options, use this engine to hedge them out. We’ll get you the liquidity you need. It’ll be a non taxable event, and the corporations loved it because it allowed them to retain employees.

The SEC didn’t love it. So, we spent seven years in the department of market reg, trying to get them to approve the fact that we were reducing risk rather than increasing risk. And then the tech bubble burst and there went the business. But in the interim, I had learned how to talk to investors. I had taken that skill set of trading and broadened it out to running a business.

I was one of the founders and as small as it was, it was like a very expensive MBA. And that’s when, just post that, Robert Rotella was running one of the really early high quality CTAs in Chicago and had moved the firm out to Seattle and they were looking for somebody with a skill set that could effectively interpret Robert’s sort of mindset, which was incredibly, you know, forward looking, but also complex as a quant is, and translate into investor language so that they could continue to grow the firm.

So I moved out to Seattle for five or six years with Rotella. Most of you probably know Russell’s also in Seattle. So Robert in 2011, decided to turn it into a family office. I went over to Russell as the head of alts. Unfortunately, just post GFC where Russell had some pretty visible issues in some of their fund-to-fund portfolios and when I realized that that wasn’t going to be a big alt shop, Campbell was looking for someone in New York, so I moved my family to New York.

Similar role right now. I’m a partner at Campbell, lucky to be a partner, one of the eight person-owners of the firm. Really, you know, sort of leading our global institutional business on my team. We have people here in Chicago, Baltimore, New York, third party in London. And so, you know, we’re really trying to kind of broaden it out and reinvent, and I’ll use the term reinvent the firm, just because every firm that’s had the longevity, Campbell has had 50 years this year, needs to kind of match the market footprint with the reality behind the scenes. And sometimes that reality is amazing, which I think Campbell has achieved. And sometimes that reality is just optics, and I’m happy to walk through that too, Rodrigo.

So hopefully that covers a little bit of your questions about background. You know, I feel like it’s kind of all come to this, but you know, a couple of detours along the way that have been really valuable.

[00:09:15]Rodrigo Gordillo: How many years at Campbell now? Seven, seven years? Okay. How big is the team over there?

[00:09:17]Joe Kelly: So, 66 people, primarily Baltimore. The only people, I think there’s six of us outside of Baltimore and they’re all effectively in sales.

We have a very large private wealth footprint in the U.S., and then, you know, a smaller team running institutional. So my team’s for, including marketing and sales, as you might imagine, research heavy.

[00:09:47]Adam Butler: So, more than half the firm devoted to that research process, Private Wealth footprint. You mean distribution into the RIA channel or direct to wealth owners?

[00:09:54]Joe Kelly: Not direct to wealth owners. That would be more, you know, sort of multifamily office, RIA channel. So Keith, you know, Campbell in the seventies was running around as Ray Dalio was selling his newsletter that we probably all remember, really early on. Keith was flying a Cessna around as he was charting commodity market patterns. And working with RIAs to get their clients into diversifying strategies, which are really diversifying, back in the seventies and eighties. And so the firm is at a really strong footprint in private wealth and RIAs from the big wire houses that we all know, and the people there that have kind of matched our longevity and great relationships all the way to, you know, some of the upstart platforms that are becoming more prominent with TAMP portfolios, et cetera.

[00:10:49]Rodrigo Gordillo: So, you know, I always like, cause we talk a lot about derivatives and managed futures and quantitative investing, you’ve been doing it for a long time. You’re saying you learned a lot. It was like a PhD and trying to communicate this stuff. Here’s an interesting question that I want to start asking people that are highly technical.

When you’re, this happens to me all the time, when you’re in a dinner party and somebody says, how did derivatives of managed futures work? Like, tell me what you’re doing, right? How do you explain that to a, to like a commonplace person?

[00:11:19]Joe Kelly So it hasn’t, it hasn’t changed. It’s so hard. I was sitting with somebody last week who has built up an advisory business, a 7 billion advisory business, and it was at a dinner party.

So this is not, again, my purvey is mostly the institutional world. And he had, he had built a really strong business of wealthy families. And we got along around to what I did. And I said, well, I worked for a quantitative hedge fund. And the first thing people say is at Campbell’s four and a half billion U.S.. They say, wow, that’s huge.

And you have to explain to them in a way that doesn’t make you sound like you’re just trying to be humble, that in systematic investing, that’s not necessarily the biggest player out there, and as you know, Rodrigo, you always have to explain that you have the resources you have, with the AUM you have, and kind of match step those to be of maximum benefit.

So the first thing is you have to explain, that being big or small doesn’t necessarily matter as much as your mindset, and what you’re trying to provide to people. He then said he does not invest in hedge funds and has no idea what systematic is. So the easiest way, and this is actually not optics, the easiest way to describe it has been Campbell because for the past 20 years, the team has really focused primarily on systemizing fundamental ideas, and this is where you know, it might be simple. It might not, but fundamental macro ideas, commodities as a driver of a given country’s FX market, depending on the, you know, percentage of the GDP that commodity is, tend to be more stable.

They tend to be more understandable. When you’re losing money, people understand. When you’re making money, people understand. And just systemizing that discretionary or fundamental idea, and everybody gets computing power. You know, we, we may or may not get into AI in this discussion, but everybody gets that computing power and scaling that globally, allows you to save some personnel on the trading team, allows you to be more efficient, maybe faster.

Kind of the way I think about it now, short term is the exception, but you don’t get into short term at a dinner party. Just, nearly impossible from a statistical explanation point of view, but you know, not so similar to the two of you, try to give tangible examples and be transparent.

Transparency, I’ve come to realize from the PM all the way down, and it has to be at the PM level. You can’t have the senior people show up and then not be transparent. So, um, that’s something we bought into, especially through COVID, and it has helped a lot.

[00:14:08]Adam Butler: In terms of the big moving parts, Campbell, would you say that that’s a pretty dramatic evolution of mandate for you guys over the last 20 years. And, I mean, how does it translate to, from an attribution standpoint, right? So, you know, is the majority of your P&L now derivative from your fundamental medium-term stuff, or is the material portion still from the tried and true kind of Trend, Carry oriented signals?

[00:14:47]Joe Kelly: Yeah. No, good question. And, you know, I’m open to hearing your thoughts as well. I know this is, you know, I’m the guest, but I’d love to have your insight. It is, is truly a progression. So Kevin Cole is the CEO and CIO, joined 20 years ago on the macro team, and we have to give a guy named Bruce Cleland credit, who was the second CEO at ….

Bruce has passed away, but he did really amazing things, like founded team and training and things outside of Campbell. But within Campbell, Bruce said, you know, just because we’re systematic doesn’t mean we have to be a Trend follower. And as a result, as you might imagine, the first thing he did was launch into Carry pre GFC, 2000 or 2001.

I knew a few people at the firm when they launched a single name equity infrastructure in StatArb, which for the derivatives space was a very sort of maturing viewpoint into putting in an infrastructure that traded a totally different asset class. And then it’s a story of building that out through the early 2000s. GFC taught the firm that short term was an important component of every portfolio.

And so they put in, Campbell, I wasn’t there at the time, put in a proper intraday short-term infrastructure 2009, 2010. So the way it’s built out right now is almost like an equal weighting between, we haven’t left Momentum behind, you know, but the convexity of Momentum. The degrees of freedom of Momentum is a little lower but you can certainly continue to innovate there and we’re trying to, but quant/macro, I mean, unlimited ideas beyond the Carry.

We call it macro dynamics. You know, how does the world work, is kind of the underpinning of how we kind of try to systemize those fundamental ideas short-term. Another area where you have unlimited sort of ideas. You know, Robert Rotella of all people, used to tell the story about, you know, you have a 99 day, and then you have a 100 day Trend model. Think about that versus a one day short-term versus a two day short-term. It’s got a hundred, obviously a hundred percent difference in terms of the way that the models might behave. So when I look at, the best evidence is the past two years. So 2021, you know, risk on.

And Campbell did really well, and it was primarily macro dominant strategies. 2022, huge risk off. We all know the events throughout the year, and Trend was a really big theme, obviously, in fixed income markets. Our best strategy, again, was quant/macro, primarily because early in the year, the Russian invasion of Ukraine, led to some EMFX differentials along the commodity squeeze that generated a lot of P&L before that big short trend in fixed income kind of flushed out in Q3, I believe it was.

So, macro… you know, has been dominated over the past two years. And then under that there’s a rotation. So this year, right now, market neutral quant/equity is doing quite well. Last year, not a surprise, Trend was the second best strategy and pretty close. And that’s kind of the point, is Kevin calls us a systematic multi-strat.

I call us quant/macro. We have underlying components you can pull off if you have a tactical idea, but overall we want to see rotation. We want to see different themes reflected in the portfolio, because, you know, if you’re good and you haven’t anchored on one effect, you should be able to rotate through those market themes and be what I call kind of business cycle agnostic.

I hate the term All Weather. It is a good term. Business cycle… it means so many things now though, right? Yeah, business cycle agnostic is the new, you know, the new term that won’t last very long, but that’s the best I, the best I got.

[00:19:03]Rodrigo Gordillo: So Joe, let’s, I want to go back to… you said quant/macro. Your partner said systematic multi-strat, right? The nomenclature in this space is so difficult, right? And I think one of the things that we’ve tried, my goal in life is to change what managed futures means to the world, right? Managed futures means Trend to most people, okay? So, you know, I’m, I tried for many, many years to change that to be like, you can do anything with managed futures.

A different way to manage futures was one of the pieces that I wrote a while back. So now we move, we, I finally gave up and I’m moving to systematic global macro. From an institutional perspective, that’s a category that seems to be very real. I mean, we were in a panel together in Chicago with Dave Triplo.

from Mercer and he did differentiate between Trend and systematic macro. So in the institutional space, how do you categorize the Campbell Fund then, and I think you have a few funds, but I guess we’re talking about the core one and when you say macro, systematic macro, whatever.

[00:20:13]Joe Kelly: Yeah, you know, you never want to be anchored in the past, and you never want to be the first, and I’m not saying we’re the first necessarily at anything, but this concept of systematic multi-strat, and from a Venn diagram, what we try to do at first, is just compare to discretionary, and then compare to multi-premia, and there’s overlapping components, and components that don’t overlap, and Rodrigo, I can send you, it’s like a, it’s not even a white paper, it’s a article, but we pounded that drum for about two years and then realized that, not surprising, I think everybody in our seat says, where is the money actually? What are the buckets at the institutions where we can be relevant?

And quant/macro does seem to be a sort of strategy sleeve that they use alongside discretionary macro. And so the way we kind of think about that is discretionary macro, five bets a year, a lot of volatility, but a home run every four or five years. Obviously, systematic macro or systematic multi-strat, 5,000 bets a year, obviously a much smoother glide path, hopefully to a positive result, but maybe fewer outliers on the upside and downside.

And so, I’ll add to your commentary, Rodrigo, about, about managed futures. I was in Japan three weeks ago and realized in about my third meeting that CTA means pure Trend follower. And I hadn’t been in that community in about 10 years. And so it took me a minute to adjust because we’re all used to explaining that CTA is just a regulatory framework, and they were using that interchangeably.

So I had to walk through that. It seems like the more of a meeting you spend on that, the more you’ve sort of lost the meeting, already. So, you know, just owning it, being able to show data that you know, again, Trend’s really important, but there’s ways to both iterate on that and add strategies to it that can be smoothing, and at the same time, there’s big institutions here in the U.S. that just want Trend. So it’s a moving target.

[00:22:31]Rodrigo Gordillo: So what, so this is where I went in my interview with Dave Triplo. Yeah. I was surprised by how much weight he gave to the multi, the kind of market neutral aspect of systematic global macro versus kind of our more traditional…. Like ,I feel like when I look at the history of your fund, you, you seem to be still quite correlated to the SocGen Trend Index, for example. Yeah, but obviously with some improvements, significant improvements. You have done a phenomenal job in the last few years of not being, I’m not giving up the gains that you made in 2022. So. How do you, how much weight do you give to the market neutral stuff versus the macro stuff?

It’s

[00:23:17]Joe Kelly: It’s so hard you know, I mean, and this is not just being opaque because, you know, this is a public podcast, but it literally is at this point, 50/50, where, and we call it directional because there’s some short-term stuff, you know, Momentum based, but it is directional, right? It’s not paired with an opposite trade.

Our derivative side of the business is now market neutral, but it is relative value. So about 50 percent of the portfolio’s relative value. Obviously 100 percent of market neutral quant equities is RV. So you can think of Campbell as like 50% directional, the vast majority of that rhymes with Momentum. Even on the short-term basis, it’ll be correlated. Fifty percent relative value, that does, you can’t use this in every meeting, but that increases the effective bets globally, which, if you’re good, should increase your Sharpe over time. And so, that has evolved to this point in the past eight years. We’ve sort of taken that portfolio construction approach, and then risk rotates obviously across them.

Your point about correlation is a very, very difficult point. So we have been in plenty of meetings, as of the two of you, where someone says you’re 0.68, correlated to the Trend Index. I’ve got five Trend followers. Look forward to seeing you next year.

And we are apoplectic because we will give people data. Sometimes, as you know, they will do the work. Sometimes they won’t. The data shows a meaningful level of alpha. And so how do you explain something being highly correlated, but having meaningful, and by meaningful I mean higher than 60 percent alpha that’s sort of unexplainable, but there’s correlations there.

[00:25:14]Rodrigo Gordillo: Yeah, it’s one of those things. It’s coincident correlation, is what I call it, right, where it just so happens that Trend did really well in 2022 and all of our other stuff did well with it. The real question is, what happens when Trend does really, really poorly and what are we likely to do? And for that, sadly, you know, there hasn’t been enough history, for us anyway, with the new kind of multi-strat to show, but with a little bit of back-testing and showing the worst performance, you can see that there is the ability here to differentiate when there’s a big, long bear market for Trend. Yeah. Where the other side actually provides a positive return.

So this is the biggest challenge. Like, well, with institutionals, we had a couple of meetings and they’re like, we’ll watch you and then when Trend does really poorly, we’ll compare and see if you’re actually very different.

Well, we can do that. We can just look at, I mean, you’re going to have six months of data or you can have 40 years of like, at least directionally, a feeling for the impact of the other sleeves, right? Sorry Adam, go ahead.

[00:26:20]Adam Butler: No, it’s good. It just, it also sort of depends on what the goal is, right? If the allocator is looking to replace one of the four Trend managers, then the higher correlation to the CTA Index acts as a benefit. And then you can lean on the alpha, right? Yeah. If you’re coming in as a diversifier to their Trend portfolio, then, you know, the alpha is less important because the correlation is higher than they want, right? So it really is a positioning question and what, that’s what the allocator is looking for at the moment, right?

[00:26:55]Joe Kelly: Yeah, we’ve had, like, everyone in our space, we’ve had people with a lot of ideas. And when I joined Campbell in 2016, the mantra going into that meeting was, well, what do you want, and we can create it for you. And inevitably, that didn’t work either, because they would say, we want your best, like, tell us what you’re really good at. So, so we kind of have this concept of top down. We have absolute return, which is everything we’ve been talking about,  but if you take quant/equities out of that, it’s managed futures, and it’s called Rodrigo, Managed Futures.

Some call it, some, just to confuse everybody, some call even that systematic multi-strat. And then you can have pure Trend and you can have standalone market neutral quant/equities. And so I like being nimble, but you can’t be nimble to the point where there’s just nothing on the piece of paper, and those usually complete some piece of what at least an institution needs.

But point taken, we started a white paper probably three times around risk allocation and how that can lead to correlations, but alpha etc., and ultimately, you know, providing data and hoping people do the work is kind of not a great strategy, but it’s, it’s one of our strategies because the alpha is there.

It’s, you just have to convince somebody to dig into the spreadsheet.

[00:28:20]Adam Butler: There’s a tension between the allocator’s desire to have greater control over the specific bets they’re taking, which would motivate them to have a more granular approach to their allocation. Right? So have a pure Trend person, have a pure Carry, have a pure quant macro, have a pure market neutral equity, not recognizing, notwithstanding the market neutral equity, which would be traded away, but that if you’ve got a variety of different strategies, you’re trading all together, you get, there’s a lot of benefit to the end allocator to that, right? You’re getting to net out, a lot of those strategies are not correlated. That’s the point of having them all together. So when one is saying go long a market, another is saying go short a market. And oftentimes that’ll cancel out.

You don’t need to trade. And so you’ve got this netting out effect, which actually can add up to, you know, when we’ve done analysis, that’s like maybe 25 Sharpe points, which is absolutely gargantuan. Yeah, and then you’ve also got the fact that, as you say, more bets implies higher expected Sharpe ratio.

They’re paying performance fees. You’re going to get, they’re going to get a higher proportion of the total performance relative to the performance fees with a more efficient strategy. So there’s definitely dramatic economic benefits, but then it means the allocator loses some fine tooth control over the specific bets they’re making. How do you guys navigate that trade-off?

[00:30:00]Joe Kelly: I mean, that’s the, the inherent argument for systematic multi-strat, and I don’t mean like equal weighted or anything else, just having diversification within your portfolio, or it could be five models, it could be 105 models, it doesn’t matter. But what we do, there’s a very simple math around first, and the risk look-through, how do you ensure that four managers aren’t loading on the exact same thing, and if you’re able to overlay like an SMA on each of them, you’re probably not going to do it perfectly.

So, the first part is the risk look-through. The second part, as you said, is netting. Third part is not paying for management fees, and then performance. Potentially, for one that’s working, that overwhelms the three that aren’t. And then the last and kind of, let’s call it two more things. One is we all have inherent biases.

That’s why we’re here is, the beauty of systematic is taking those biases out. So as an allocator, you know, which I guess, theoretically I was at Russell, you sit in a room and you say, what are our themes for next year? And if you have four themes that we described here, Momentum, quant macro, short-term, quant/equities, inevitably you’re going to top tick a theme or two.

You’re going to bottom tick a theme or two and not in the, not in the right way, in the wrong way. And so we have this great, what people call a quilt chart. I call it a periodic table that shows the rotation over year after year after year where you say, you cover up a year and you say, what’s going to happen this year?

There’s no way you can predict that. And so having four managers just at the outset solves for some of that. But think about this for us, the mandate has changed. We want stable risk, thin the tails. So no big right tail, no big left tail, normal distribution, uncorrelated to risk assets. That’s kind of how we define quantum/ macro.

And so if you’re going to have a diversifier, when you need the diversifier, you need risk, right? And this is the hardest thing. So for us, let’s call it 10 to 14 percent annualized risk. That’s pretty normal, but not risk that’s all over the place. Risk that’s, I’m going to use the word predictable, pretty controversial word, but with all the diversification, it’s more predictable than having two models, if you will.

And if you take your concept of four managers and each are running a 10 vol, the portfolio effect of the lack of correlation is going to net those down to a four vol. If you get a one Sharpe, which is a pretty darn good Sharpe, you got 4 percent return on a four vol, just oversimplifying the math and yeah, risk free is at five, but with inflation, it’s three.

So you’re still winning. Obviously, we talk a lot about multi-PM shops having that footprint. Really, really unbelievably high quality shops putting up a four, you know, four vol, two Sharpe, three Sharpe. Amazing. But what happens when the Sharpe goes to one as it is, you know, with some this year? And the way we kind of counterbalance that is, look, we can give you a 10 vol forever, through the systematic process and one Sharpe better on that, with no correlation to risk assets. Having it all under one roof is really kind of the kicker and some think that’s high, some think it’s low. We can’t control for that. But the one thing is, when you need a diversifier, you need a lot of it. Because equity risk goes crazy, as the three of us know.

[00:33:38]Rodrigo Gordillo: Can I just tap on that, when you need a diversifier comment? Because I think a lot of the pushback on diversifying away from Trend is that, no, no, no, I need the convexity. Right, I need the Trend convexity. And so I’m curious to hear what your response to that is. Do you feel like you’ve given up on the convexity in order to stabilize your return streams in other years? Or do you feel like it’s just as useful?

[00:34:05]Joe Kelly: So, like anything, there’s always trade offs. If you have normal distribution and thin tails, you’re giving up, you know, you got to give up Sharpe to get one of those tails, hopefully the right tail, obviously a little, a little juicier. So, and that almost plays out exactly, Rodrigo, you know that, it’s… The 0.6, 0.65 Sharpe of a Trend with massive convexity is awesome if your portfolio construction calls for that multi-strat with normal distribution, you know, one Sharpe on a 10 vol, maybe more than that, also important to different utilities, in my opinion.

And so we have both, we have some institutions in pure Trend. We have a PM, proper PM of the Trend strategies. They’re being iterated on similar to what the two of you and others are doing. You know, you can’t leave it behind. We have another process that at first, you know, we were a little bit late to the pure Trend game.

So we launched that into 2016, 2017, some other firms had gone into the risk mitigation space for pretty big AUM at that point. And so we thought we had to do something a little bit different, even with 40 years of history at that point. So we developed like a risk scaling technique that looks at correlation and equity of all and scales it. It sort of goes into the light rather than risk targeting and reducing risk when equity vol is expanding. We’re actually increasing it as long as the correlation properties are beneficial. And what that means is we have something a little bit different in the pure Trend space that can give you a lot of convexity when you need it.

Obviously at the bottom, when you’re running at high risk, uncorrelated to equity assets, and there’s a reversal, we all have trouble. This is running at very high risk in that case. So even in pure Trend, we’re trying to provide a little bit of a different approach. And as you know, most of the big risk mitigation portfolios have two, three, four Trend managers.

And that kind of gave us an opening to maybe come in and add some value along the edges or around the edges. So, you know, we all know the trade off. It’s Sharpe, you know, for obviously, for a big hopefully right tail. We’re trying to do both. And yet, I still am trying to convince people that we’re no longer just a Trend follower and that continues.

[00:36:47]Adam Butler: So can I, can I just dig a little bit deeper on that? Because, I remember now looking at that mandate and thinking that’s a great idea. And I remember we did some work. I’m just wondering which direction you guys went. So are you guys, you guys sort of have an optimal portfolio, but then you’re scaling the risk? I’m just wondering which, to that optimal portfolio in response to that or that portfolio sensitivity to equity beta and redistributing it and okay, good.

So you’re, you’re sort of creating the optimal portfolio while simultaneously maximizing the diversification properties relative to equities. There’s sort of a joint optimization happening there.

[00:37:46]Joe Kelly: Yeah, the next level that you’re going into Adam is like, sometimes PMs or managers will have a correlation cap. And again, this is really, you know, in the Trend space and one of our bigger clients, public clients used to call it first mover. So you’re already going to be positioned even if there’s some negative Carry associated with a correlation cap on equity risk. I mean, it’s tough for boards to hold on to some of this, but, you know, some consultants, I probably shouldn’t name who, have done a great job putting this in and have helped all of us. You know, David, who you mentioned, has done a great job. Other competitors/peers have done a great job.

So if, if we go to the route, to the extreme and we say correlation cap, you’ve got to redistribute the risk, right? Because you have to be risked. And that’s where sort of, I’m not going to say nearest neighbor, but sort of that concept of what’s the, what’s the closest we can come to this, but honor what we’ve promised the client. And that’s where the second derivative comes from, which you described, which is redistribute, not just varying your risk, but redistributing it over the portfolio. And it’s, it’s not perfect, but it’s a different variation.

[00:39:03]Rodrigo Gordillo: Yep, yeah, you’re trying to offer a differentiated approach to the age old problem of hedging risk, right? So I don’t, I know there’s nothing perfect. Otherwise, you guys would all be at a hundred billion dollars plus. So let’s talk about AUM management and, you know, again, with that conversation with David Triplo, he’s done a great job, wrote a white paper explaining it, trying to go out in the field, getting the field officers to really talk about risk mitigation and all that.

He’s getting a big whopping zero, in spite of what’s happened in the last couple of years. So I want to talk to you. What’s that? Sorry, David. I know, we’re, we’re helping him. We’re helping him. We’re getting the word out. Yeah, there’s two aspects here. You know, you talk about the Trend and you less of a Trend manager and then you have this kind of more holistic approach.

Have you found that that pivot has allowed you to get more interest from allocators on the holistic approach? Like what’s the growth of your trend strategies versus your holistic approach?

[00:39:59]Joe Kelly: Yeah. So, I hired someone last year who wasn’t in our space really. I mean, great, great person. And the first thing that person asked was could they get access to the mandate wire database because all the RFPs that are going to be coming in for systematic, and I had to explain to him, the first lesson was there’s really no, very few RFPs in this space.

So when you talk about the balance between the two, there are one, two, three a year in the pure Trend space, because it’s consultant driven. And that’s, that’s tends to be where we focus our efforts with those products. We don’t have a team just focusing on that. What I tend to do, Rodrigo is I lead with mult-strat.

And then if they say they, they need something specific, we can do components of that. And that’s all been by design. It’s, it’s because then we can, with a hand on our heart, say the research process is identical. We can say people are paid identically. And so the bias, our own bias towards a portfolio is removed.

And you get, if you like our process, then we just need to decide what the right strategy for you is. Rather than having a team here, a team here, who knows who the superstar is. Are they, are they good or are they cancerous in terms of the culture, etc. We’ve tried to solve that piece as well. And it comes out in the product side.

But again, we have to use the caveat that I’m only in charge of institutional, but I tend to lead with multi-strat every meeting, and then we kind of unwrap it as we learn more.

[00:41:46]Rodrigo Gordillo: And as you go to the institutions, you’re obviously you’re not getting RFP, so you’re sourcing it yourself, right? You’re going out there. Yeah. Yeah. How have you found it? How have you found the receptivity pre-2022 and post-2022?

[00:42:01]Joe Kelly: Good question. March of this year, I think, put a little bit of cold water, on people’s receptivity because there was a little bit of, oh, I told you so, you know. At the same time, those reversals were minuscule compared to some of the convexity from last year. So, you know, December 31st is just a number, type of concepts. And it’s about, I’ll be honest, it’s about equal. We, we’ve broadened out our geographic scope, great clients in Canada, you know, Australia, I mentioned I just got back from Japan.

We’re, we’re trying to do more You know, especially in environments like, absent, you know, the news this week about, the BOJ and some of the yield curve control activity. Places where they’re net savers, all of a sudden their interest rate and environment is falling, their equities are falling.

And you and I walk in and it’s a long process, but we look really good. I mean, incredibly good. And so, you know, it takes a long time to get some of those relationships right off the ground, but thankfully Campbell has a pretty slow burning fuse with regard to the business side of the business. And they realized like, we need both. We need great research. We need a long view on, and hopefully those two balance each other out over time. The one thing we refuse to do, and admittedly this is self serving, we will not be a 50 billion or a 100 billion shop using flow models and risk premia. At our size, we keep researchers because we focus on alpha and, you know, allow them to do interesting work. And some of that you just, it goes away when you’re 50 billion, as you know.

[00:44:02]Adam Butler: Yeah, well, let’s, let’s talk about that for a second, because that’s, I think, an area of general interest, and I think allocator interest specifically, the question of how well strategies scale with, you know, performance scales with AUM, seems intuitive that we talk about number of bets, for example, right?

You get more bets from adding different strategies or strategies that are informed by different kind of sources of information. Obviously, you also, in theory, get diversity from adding or having a diversity of different markets to trade. So, you know, if you move into the equity space, obviously, you’ve got a, that really opens up the diversity, which, I think is a great move.

On the futures side, it just seems intuitive anyway that you’re, as you sort of grow from a few hundred million dollars into several billion dollars, that there’s just fewer markets that you can trade where the dollar contribution to P&L would be meaningful in those markets. How, how have you guys navigated that over the years?

[00:45:21]Joe Kelly: Yeah. When you, I mean, the best example is all of us talking about diversification. Even just take one Trend signal, you know, apply it to normal markets, alternative markets, et cetera, et cetera. And, you know, and then you get an index with 14 underlying markets and it outperforms you, and you have to go to the client and explain that, you know, that’s just one very small data point.

And, so,  we, it’s a tough question. We, have not gone the alternatives markets route for size. And we had this discussion and I was in the room. We said, do we want to apply models that we know will someday be risk premiums, carry some Trend strategies, et cetera, into less efficient markets and build a business on that, or do we think that’s going to decay just as quickly, once the third or fourth or fifth player comes in?

And by the way, there’s operational challenges and counterparty risk and all the things you know about in alternative markets. And some firms have done an amazing job and all credit to them. But it’s really hard to walk in and kind of discredit it and say, it’s an old model in a new market. But it is what it is.

What we decided instead is we’re going to take sort of the skill set we have and generate alpha in the markets we know, because we think that’s more defensible for a longer period of time. Like, it will decay, not based on new players in the market, but based on new ideas coming in, et cetera, et cetera.

And so, we weren’t entirely correct. You look at the growth of alternative market AUM. I wasn’t right about a stress period like COVID affecting those. They did just fine, and so again, all credit. But we feel like our knitting is trying to examine markets where we do have an edge and generate more specific…

I mean, we have some models that trade one market. So, you know, obviously the concept of Trend is pretty much universal application or some broader application. So generate alpha and one market with one model, hopefully in a unique way, and have it to be defensible over time. You and I and a few other people in the industry know some people that have come out of very large places and when they do well, it’s explainable. When they don’t do well, it’s not as explainable for some reason. It’s, it’s sort of, you have to follow that tide and it’s really a difficult spot to be in as a small manager. But at the same time, if you can prove you’re adding value over it, maybe there’s a space for you in the portfolio.

I feel like I rambled a little bit there. It’s a difficult question, how to talk about scale when you don’t scale.

[00:48:21]Adam Butler: Well, no, I mean, I think so to sort of, if I can maybe sum it up for clarity, it sounds like you guys have decided to focus on a more core universe of markets that you believe you’ve got sustainable differentiated hedges in,  and that’s the direction of research, and less trying to scale by operationalizing alternative markets and going in some of these other directions that some others that pursue.

[00:48:55]Joe Kelly: Yeah, that you’re, again, you’re, you’re better at this than I, I mean, when you walk into some meetings and you have IRS, CDSX, CDS indices, et cetera, some people like, that’s plenty, like they’re happy with that. And some want, you know, they want eggs and wins and other areas that are really operationally challenging.

[00:49:18]Rodrigo Gordillo: Uh, so when you go in and you compete against, forget about like other people in the space, but you’re competing against room in the alternative sleeve. What do you think are the comparative advantages of a futures based model versus other alternatives? And, and do you feel like it’s useful? Like the different, just the product, like the fact that we’re derivatives versus, you know, private equity?

[00:49:45]Joe Kelly: Yeah, I mean, we’ve all met with the analyst that came from, the way I describe it, whether I’m across from somebody or hiring somebody, I think it’s easier to put a systematic mindset into a fundamental strategy than it is take a fundamentally oriented person and put them into systematic. I think that’s a really high bar to sort of be relevant because there’s some really good allocators in our space, sort of vis a vis, you know, 401k’s in the U.S. and you read the headlines about private equity really pounding the table about the regulatory environment that’ll allow them to get into a 401k. And it is the holy grail. It is huge scale, hundreds and hundreds of billions of dollars, if not trillions.

We are a natural fit today, and Rodrigo, I don’t think you’re going towards the interest rate piece of it, but being a net borrower in long/short equity or private equity and having the interest rate environment, obviously scaling the way it is right now, where even your bridge loan right now for three months is nine percent, versus a derivative strategy that obviously requires 20 percent margin to equity, to put 70 percent of your margin into a cash earning account and have a tailwind earning risk free really, in most of those cash management accounts, hopefully risk free, because you’re not adding alpha or generating returns there. So it’s, it’s a huge deal. And for the strategy, it hasn’t earned us a bigger spot today.

Earlier today, we were talking about what that means for hurdles. You know, I think everybody realizes that your stated return over risk is in addition to risk free, not, you know, incorporating risk free, but at the same time, I wish it had earned us a bigger spot in the portfolio. It’s almost a place to park additional capital because of that tailwind, but I don’t think we’re necessarily going to grab a lot of market share from private equity.

It doesn’t seem, you know, the liquidity, the daily pricing, et cetera, it doesn’t seem to put people in a more sort of favorable way to think about it then, to the lack of pricing clarity and private equity. I talk maybe in a very un-PC way, which is kind of the point of this forum. I do talk about risk management in pretty stark terms around like the concept of just buying more when something’s going against you, is not really risk management. Whereas, I mean, what the two of you have put into it, what Campbell and our peers have put into the risk management art of having all of these models and portfolios, that in itself, should earn whatever portion of fees we earn, because the level of sophistication there is, I think, the best in the industry. It has to be. It’s just the most complex.

[00:52:51]Rodrigo Gordillo: I do want to get into the risk management. That’s going to something I want to end on, but I do want to kind of address that that point of cash of the hurdle rate that we have as a managed futures manager, systematic macro, whatever, versus somebody that has to do a full borrow, right?

I kind of was doing the math of, so we run overlay strategies. So we have a lot of kind of single family offices that just give us single stock positions, long positions. But what I did is I said, okay, what actually is that, what’s the borrow? What’s the cost of borrow right now, is somewhere around 5, 6%, but we only need, like you said, to borrow 15, 20%, right?

And so the hurdle rate for like what a systematic manager using futures needs to do is, the hurdle rate I kind of came up with was one and a half to 2%. It’s not six, five, six percent that we need to do in order to actually compete. So this is a big misconception where people are like, I don’t know about these strategies.

They have a big hurdle rate. Look, it’s so expensive to borrow right now. I think that’s a part that’s missing because we don’t need to borrow the full amount. We need to portion the amount. And yes, it is the full six percent, five, six percent. But again, it’s a small portion. That’s the beauty about derivatives.

And then the other beauty is, like the other discussion we were having this weekend on Twitter was you know, what do you expect to make if rates are really high for a long period of time? And what I think the average retail audience doesn’t really understand about when you, what you’re trading in futures is you’re trading the excess returns, right?

You’re actually trading equity lines that have already stripped out the cash. And if you are worth your salt, you’re making a P&L above, it doesn’t really matter. You’re just making, you’re either making a positive return or you’re not, regardless of cash. And whatever P&L existed over the last 10 years when rates were zero is kind of a, you know, it’s irrelevant what the cash is. Hopefully there’s some consistency in that space and you have an extra chunk of change on top.

So that’s an important thing. I think the audience needs to recognize that the way managed futures managers think about it is what’s your excess returns and can you count it in a consistent basis, regardless of cash? I think we can. The hurdle rate is much lower. So just a piece of PCA.

[00:55:10]Joe Kelly: You can, you can probably write that up, you know, in a day. And honestly, we’re probably not all as practiced at it as we should be, breaking it down, because there was obviously too low for too long. It didn’t matter for a long time. Yes, exactly, so I would help you circulate that. We don’t need our name in it. I think it’s a public service announcement for all of us to sort of break it down in a thoughtful way and I think that’s a huge piece of it when you’re looking at, you’re comparing two different strategies. You probably shouldn’t be comparing anyway, but you do.

[00:55:45]Rodrigo Gordillo: No, the piece we’re going to do is just, it’s going to be a piece, it’s going to be a video, it’s just showing the advantages of using futures. And then I guess the question that leads on to that for you is, do you continue to get interest on, like, are people making space for your strategy? Or are they looking to, for you to kind of stack it on top? Like, are you getting capital efficient mandates or are you fully selling a fund to these institutions?

[00:56:12]Joe Kelly: Oh, that’s a great question. As far as we, so, so I, I know some of what you and I have talked about around both aspects of that. And I think you guys have done an amazing job at showing people that it doesn’t have to be a prepackaged deal and can really complement what they already have.

And I think it’s like you said, in Chicago in our panel, and this is something that most of us actually really do believe, like growing this industry is paramount. And then I can appreciate what you do. You can appreciate what others do, et cetera. I, you know, I’m still old school I guess, enough to think that that’s possible.

We are a little more oriented towards somebody making space, shelf space for that fund. What I don’t know is how somebody utilizes that when they have an SMA. And sometimes they’re very transparent with us, sometimes they’re not. And if they’re not, we’re just happy to have the relationship and be providing value and then they can do what they wish.

But we sort of lead with fund. And that is still raising capital. So you know, I think you’re better at the other aspect of it, which is layering on and showing people that you can repurpose some AUM in a very small degree and get that exposure. Honestly, I think you’re, you’ve gone down a really interesting road with that, and we’re maybe a little bit behind on that front and still raising money in structures.

[00:57:54]Adam Butler: Got it. Well, what’s remarkable is that you’ve got these institutions with large cash books. They own, they’ve got a huge book of cash collateralized securities and most of them are not making use of that cash collateral and instead, they’re going around the world looking for new opportunities to make private investments, which in general have a lot of money.

Not just poor liquidity, but also poor capital efficiency. If you look at the potential benefit to a portfolio, whether it’s a large pension or a family office or an individual investor who’s looking to retire, of taking their general equity allocation, or if you want an allocation to equities that better mimics a private equity type return profile, so maybe load them heavily on mid-caps, quality Value type characteristics if you’ve got that kind of portfolio, or if you can create it in public markets, which obviously you can very easily, and then later on a diversified futures strategy.

[00:59:14]Joe Kelly: Right.

[00:59:15]Adam Butler: Absolute expected return and the, especially the risk adjusted expected return on that kind of allocation is so much more attractive than what you would get on a private equity investment at the same, of the same kind of level of capital or at the same risk exposure. It almost is a shake your head kind of moment, right?

I mean, it really is astonishing how more institutions haven’t realized what is available to them. They keep recycling the same old private investment mindset. And over here, you’ve got this opportunity to produce a quantum leap in absolute and risk adjusted performance for the investment committee.

So, you know, whatever we can do as an industry to continue to educate and promote this opportunity, I think serves us and serves the broader allocation community. So if we can, you know, let’s, let’s get together on that quest for sure.

[01:00:18]Joe Kelly: Yeah, no question. There’s even a newer, not a newer, a model we’ve seen more recently where they’re taking outside managers, the liquidity they’re sourcing is in the book of the institution, which I think is really cool. But your comments don’t change, like layering a cash efficient derivative strategy on top of even that is still almost identical, but it solves a little bit of the inefficiencies with having an outside equity manager and a huge pool of equities in house.

[01:00:50]Rodrigo Gordillo: So Joe, I know you got to leave in a bit. So let’s, I just want to leave with risk management. You know, we, that is kind of the bread and butter of all this. It allows you to maintain a consistent experience for the investor. And, and I think we, nobody does it better than futures managers. So why don’t you tell us a little bit about your process and Campbell’s process and how you think about risk management, or at least how you articulate it to your prospective clients?

[01:01:16]Joe Kelly: Yeah. I have to give a shout out to a colleague named Grace Lowe, who’s the head of our risk. She has for over 18 years now been at Campbell, and has really taken huge steps in not only thinking about sort of the resulting risk of what we all do in the portfolio composition, et cetera, but then sort of shaping the risk in meaningful ways. I’ll tell you what I mean by that, Adam. You know, first, the mantra is, I mentioned this earlier, because we can’t predict in a given day, week, year, what might be a dominant strategy.

If, barring liquidity and Sharpe, equal weight everything, you know, be as unbiased as we want investors to be, when they’re investing in multi-strat and there’s a lot that goes under the hood in that, obviously taking in market data correlations, etc. So, you know, “equal weighting” is not exactly a simple exercise, 130 models, thousands of markets, etc.

We optimize throughout every single day. So every new position that comes in, we’re re optimizing. There’s a lot of development over a decade on that piece. So we consider risk like our fifth strategy, right? I mentioned the four earlier. It’s our fifth. And rather than for us being the policeman, or a policewoman who overlays the portfolio and says, don’t do that, don’t do that, or God forbid a multi-PM shop where they’re allocating risk and then taking it away, almost just kind of it as the discretionary exercise. What we want to do is have Grace sit within these teams and have her team work with each of those teams and have each of those teams work with each other.

It sounds very idealistic, but this idea of collaboration and leveraging IP across the organization is absolutely core to what we believe is the best utility for our clients. So having Grace sit with those teams, think about, you know, a new model coming into the portfolio at lower risk. This isn’t necessarily unique.

Having a post launch review after there’s some out of sample period. You know, every time you risk something up, you’re going to talk about reallocating risk from somewhere else. And, you know, per our comment earlier about redistributing risk on a correlation capped Trend strategy, we have a really robust process for doing that systematically.

So we don’t have to tick and tie every line item and say, we want it here, we want it there. Our job is to not do that. And so when you aggregate all of that up, you’ve got to, you have an expected risk in the portfolio. Then you lever that portfolio up or down based on the risk target you’ve talked to your client about.

And then comes in the really interesting stuff for us, which is, you know, Grace for more than eight years has been developing a macro factor database. So flight to quality, long dollar, you know, and then you talk about like a COVID risk factor, or a China recession risk factor, which has been a big theme this year, as you might imagine, or, you know, a commodity inflation factor.

And we can measure the risk of the total results of the portfolio against that factor, which, there’s hundreds and hundreds, but there’s like 70 that are meaningful, and maybe even just 10 that are really, really meaningful. But we also have new techniques that you guys will guess in a heartbeat what they are, to measure the market’s crowdedness to those factors and have a systematic process where you don’t just keep adding risk to short interest rates ad nauseum.

So if you notice that your resulting risk is correlated to something, sometimes it’s pretty crazy, China recession, China easing, and you notice that there’s a lot of people that have piled into that over the past eight weeks and that some huge component of our risk has been attributed to that, we have systematically, the portfolio to start not taking new positions, not necessarily scaling back, because that’s redistribution, but don’t take new positions if it’s getting more and more, more and more crowded. So Rodrigo, to your point, and I know that’s a really complex answer, it is a fifth strategy, lot of energy, it’s fifth strategy.

Um, it is important that people don’t feel like they’re being policed, but helped. And as a result. You know, when we promise predictable risk, if we don’t deliver that, you’re going to start getting outliers that we can’t explain. And so, I hope that touched on it. It was a really long, but short answer and more to come on that front.

[01:06:07]Adam Butler: You know, what I really enjoyed about that is, um, is how Grace, um, adds value at each level of the analytical process. It doesn’t just sort of sit over the portfolio and run scenario analyses and robust bar analyses, and say you’re too overweight this risk, or too overweight that risk, in real time.

Because. So much of the risk accumulates during the actual research process through the biases that are expressed, that are really easily missed. It’s through the decisions that are made on hyper-parameter specifications or just a narrow view on how you’re going to express a certain signal, or what have you that having a sort of independent set of eyes that is close enough to the process so that they understand it at a fine level of detail, but are not so invested in what went into the most recent iteration of it, that they’re able to sort of step back and provide that less biased view and provide some guidance on how to, you know, just that sort of ensembling, right. Just the equal weighting is, just, just speaks to a level of thoughtfulness. And it has to be said, limiting bias from the… I agree, and thank you, it has to be said.

[01:07:40]Joe Kelly: The three of us, everybody in this industry, most of it comes from scar tissue. It does not come from this, you know, smarter view of the world. It comes from a lot of lessons learned and, you know, you just hope you can progress.

[01:08:04]Rodrigo Gordillo: Yeah, very well said. And with that, Joe, thank you so much. I know you have to hop. Thank you. Really appreciate your insights. Would love for you to come back again in, you know, I don’t know, six months, next six or 12 months.

[01:08:16]Adam Butler: How can people find you, Joe?

[01:08:18]Joe Kelly: Yeah. Uh, I’ll give you my email. Thanks for asking that. It’s joe.kelly, K E L L Y @ Campbell.com.

[01:08:28]Rodrigo Gordillo: And your website is www.campbell.com. I love that you grabbed that. So simple.

[01:08:34]Joe Kelly: I got, I have more stories for you there.

[01:08:38]Rodrigo Gordillo: There’s no way that that’s their URL and it is. That’s perfect.

[01:08:41]Joe Kelly: Yeah. Well, thank you. Love it. Thank you guys. Really appreciate your time.

[01:08:50]Adam Butler: Thanks Joe. Really great convo. Take care.